Managerial incentives and a firm's cash flow sensitivities

This paper adds a new perspective to the compensation literature by examining the impact of managerial incentives on firm behavior in an information asymmetry framework. The analyses show that managerial equity-based compensation exacerbates firms' information asymmetry problems by focusing man...

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Bibliographic Details
Published inInternational review of economics & finance Vol. 27; pp. 80 - 96
Main Author Xu, Pisun (Tracy)
Format Journal Article
LanguageEnglish
Published Greenwich Elsevier Inc 01.06.2013
Elsevier Science Ltd
Subjects
Cash flow
Cash flow sensitivities
Compensation
Executive compensation
Incentives
Information asymmetry
Managerial incentives
Organizational behavior
Studies
G34
Managerial incentives
Executive compensation
Information asymmetry
G30
Cash flow sensitivities
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Summary:This paper adds a new perspective to the compensation literature by examining the impact of managerial incentives on firm behavior in an information asymmetry framework. The analyses show that managerial equity-based compensation exacerbates firms' information asymmetry problems by focusing managers on the interests of existing shareholders. Firms with equity-based compensation rely more on internal funds. When there is a one-standard deviation increase in managerial equity-based compensation, firms will invest $0.05 more, save $0.02 more as cash and make a $0.07 lower net payout in response to a $1 increase in cash flow. Furthermore, the significant impact of managerial incentives on firms' cash flow sensitivities is predominant in small firms and firms with high market-to-book values.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2012.09.004